Monday, September 13, 2010

Given the deluge of bullish activity over recent weeks, we've seen the market traverse its entrenched trading range yet again. Practitioners of technical analysis placing significance on support and resistance levels would assert the markets are quickly approaching a critical juncture. Ever since the aftermath of the May Flash Crash, 1130 has acted as the proverbial ceiling in the sky curtailing each bullish advance. Whether you argue that past is prologue and expect the bulls to once again be rebuffed, or expect this particular test to yield different results, it's tough to deny the low risk/high reward entry being proffered by Mr. Market for bearish trades.

Take the SPY for example. If your exit point sits right above resistance you're looking at about $1 to $2 risk. Now, as for the target, I'd say bare minimum a one Average True Range drop could be in the cards. Setting the bearish sights higher (or lower as it were), who's to say the market couldn't return back towards the lower end of its range (click image to enlarge)?

With volatility sitting at its lowest levels since before May's fireworks, we could make a compelling case that buying options may not be a bad idea around here. So, how about entering bearish risk rocket by shorting some stock and buying puts? Consider the following example:

Its certainly possible to find stocks worth buying that trade under 1 dollar but for the most part I find stocks of quality under 1 dollar to be rare. I much prefer stocks trading on nasdaq or the new york stocks exchange that trade between 1 dollar and five dollars a share.

Disclaimer

All content on this site is provided for informational and educational purposes. Furthermore, information contained herein reflects the opinions of its author and is provided for discussion purposes only. Under no circumstances does this information represent a recommendation to buy or sell securities, nor should it be construed as investment advice. Although the material is deemed to be accurate and reliable, I don't make any representations as to its accuracy, as a result there is no guarantee it is not without errors. I may or may not have positions in some of the names I mention.